A shift from S1 to S2 reflects the change that happens when a negative externality is taken into account. A shift from D1 to D2 reflects the change that happens when a positive externality is taken into account.
-Refer to the above figures. A negative externality existed but has been corrected. Price and quantity will be
A) P1 and Q1.
B) P2 and Q2.
C) P3 and Q3.
D) P4 and Q4.

Question

A shift from S1 to S2 reflects the change that happens when a negative externality is taken into account. A shift from D1 to D2 reflects the change that happens when a positive externality is taken into account.
-Refer to the above figures. A negative externality existed but has been corrected. Price and quantity will be
A) P1 and Q1. 
B) P2 and Q2. 
C) P3 and Q3. 
D) P4 and Q4.

Quizplus · Accepted Answer

The shift from S1 to S2 reflects the correction of a negative externality, which means that the cost to society will be reflected in the price paid by consumers. This shift will result in a higher price (P2) and a lower quantity demanded (Q2). The shift from D1 to D2 reflects the inclusion of a positive externality, which means that the benefits to society will be reflected in the demand for the product. However, we do not know the direction of this shift, so we cannot use it to determine the final price and quantity. Therefore, the correct answer is B, P2 and Q2.

A Shift from S1 to S2 Reflects the Change That